When charities let telemarketers gouge donors

Little less than a year ago, Ohio Attorney General Mike DeWine called Ohio Cops for Kids a “purported charity” when he sued the group for allegedly defrauding donors in his state.

The complaint claimed that the group spent merely 2 percent of the money raised on its behalf on efforts related to its official mission of helping children whose families were victims of crime. Telcom Enterprises, a for-profit fundraiser the charity hired, kept 79 percent of those funds, and the nonprofit spent the rest on its salaries and overhead, according to DeWine’s lawsuit.

This alleged racket may sound like an isolated case of extreme malfeasance. But the Ohio Cops for Kids case is only one example of for-profit telemarketing companies accused of turning donations intended to support good causes into private gold mines.

Cleveland’s News 5 reported on an Ohio-based charity claiming to work ‘hand in hand’ with law enforcement agencies across that state but is being accused of bilking over $4.2 million from thousands of donors.

Telemarketing trouble

While researching the finances of charities and the for-profit fundraisers they hire, I have noticed two related problems with the practice of farming out fundraising.

Paying for-profit companies to fundraise for charities isn’t inherently problematic. Because outsourcing gives nonprofits room to focus on work donors really care about, it can be more efficient than hiring in-house staff. This is especially true when there are high upfront costs for fundraising campaigns.

But more often than not, charities that rely on contractors for telemarketing campaigns wind up raising less money for the charity’s operations than they do for the telemarketers, especially when they pay fundraisers on a commission basis.

New York State Attorney General Eric Schneiderman’s office examines regional and national professional fundraising campaigns. In 2017, it found that telemarketing companies pocketed more funds than they passed along to the charities they worked for more than two-thirds of the time.

More shockingly, 18 percent of the time, telemarketers charged charities more in fees than they ended up collecting in donations, leaving the nonprofits worse off than had they not sought donations in the first place.

Call me never

Whatever their track record, telemarketers have become increasingly reliant on charitable fundraising, if only because other options are being precluded.

One typical defense of the profits earned from charitable telemarketing is that paying telemarketers big bucks is worth it if they make obtaining charitable dollars easier in the future. But do they?

After combing through data collected by state attorneys general serving in California, Michigan, New York and elsewhere, I have seen little evidence that telemarketing campaigns generate more donations at a lower cost over time.

Another complication is that charities face few disclosure requirements. One exception is that they must file annual financial reports with the IRS, including the cash their outsourced fundraisers collect from donors and how much of it their contractors retain.

Done right, this mandate should let donors figure out how much of their money the charities spend on this service. But the data is not reliable.

Even charities that follow proper reporting practices can exploit a little-known rule to treat some payments to telemarketers as “programming costs” when their pitches help satisfy public education goals.

This makes it difficult for even the most diligent donor to know precisely how much money telemarketers retain, unless they hear about it from the media or watchdogs like Charity Watch.

The Ohio Cops for Kids case shows the potential for aggressive action by state authorities. However, the fact that the offenders in extreme cases may profiteer for years without suffering consequences also highlights a festering accountability crisis.